More and more companies are hiring independent contractors (ICs) instead of employees to meet their business needs, and for good reason. Employers may not have enough work to hire someone full time, their budget may be too tight to cover an employee’s benefits, or a project may need to be turned quickly, which an experienced IC can accomplish rather than a new, untrained hire.
It’s critical that employers understand the difference between ICs and company employees so these individuals can be classified correctly. A 20-question IRS employment status test can help employers make that determination.
Here’s what the IRS has to say about ICs:
The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.
If, however, an employer-employee relationship exists, individuals are not independent contractors and their earnings are generally not subject to Self-Employment Tax. Their employee earnings may be subject to FICA (Social Security tax and Medicare) and income tax withholding.
Misclassified employees often are denied access to critical benefits and protections to which they are entitled, such as minimum wage, overtime compensation, family and medical leave, unemployment insurance, and safe workplaces. Employee misclassification generates substantial losses to federal and state governments in the form of lower tax revenues, state unemployment insurance and workers’ compensation funds.
In FY15, investigations by the Wage and Hour Division (WHD) of the United States Department of Labor resulted in more than $74 million in back wages for more than 102,000 workers in such areas as the janitorial, temporary help, food service, day care, hospitality and garment industries.
This is by no means an exhaustive list, yet it highlights the critical need for companies to take proper steps to ensure their contractors and employees are properly classified. The WHD will continue to investigate possible misclassifications to ensure workers in these industries are properly compensated.
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Independent Contractor or Employee: Do You Know the Difference? by PDCM Insurance